4/15/2002 @ 12:00AM

Double Play

Is $700 million a lot to pay for a moneylosing team that hasn’t won the World Series since 1918? Not when a grossly undervalued cable network is included.

If you want to understand what drives the economics of baseball these days, just look at the recent sale of the Boston Red Sox.

The Red Sox haven’t won the World Series since 1918, a year before they sold Babe Ruth to the New York Yankees. Boston’s home, Fenway Park, was built in 1912 and is the smallest in the majors. And last season the team had an operating loss of $11.4 million.

Yet in February a group led by John Henry, then-owner of baseball’s Florida Marlins, paid $700 million for the team, more than twice the previous record sale price (the $323 million Larry Dolan paid for the Cleveland Indians in 2000) and $550 million more than Henry paid for the Marlins just three years ago. What gives?

Along with the team and ballpark, Henry also got an 80% interest in the New England Sports Network (hockey’s Boston Bruins own the remaining 20%). Lawrence Lucchino, president of the team and a minority owner, says: “The value of the Red Sox and NESN combined is far more than the value of the two entities separately.”

Here’s why. Prior to Henry’s purchase, NESN, which is broadcasting 86 Red Sox games and 54 Bruins games this season, struck deals with all the major cable providers in eastern Massachusetts to move the channel to their basic cable lineup. Switching NESN to basic cable pushed its reach to 3.8 million homes across New England, more than double the number of subscribers who paid to watch Red Sox games when NESN was available only as a premium channel.

The Red Sox and Bruins provide NESN with plenty of guaranteed, prime-time programming in the nation’s sixth-largest media market. And, unlike ratings for baseball on national TV (which have been declining), those on cable have remained high because fans always get to see the home team.

The Red Sox in particular have a very loyal fan base. Last year an average of 400,000householdstuned in to each Red Sox game on NESN. There are few baseball teams that do as well on cable. Only New York’s Yankees and Mets–in a much bigger market–draw more viewers.This year NESN’s revenue will be close to $90 million versus $75 million in 2001, according to John Mansell of Kagan World Media. Pretax cash flow (in the sense of net income plus depreciation) should be around $20 million, $5 million higher.

The additional revenue the Red Sox owners rake in from NESN will never increase enough to equal that of the New York Yankees, who play in baseball’s biggest market and have started their own cable sports network. But the Red Sox will surely have the money to sign enough star players to challenge their hated Bronx rivals on the diamond. Our calculations show the Red Sox increasing 26% in value, to $426 million.

And NESN, which shows heaps of other sports programming–such as college basketball and football, boxing and bowling–is likely to increase revenue much more. Among the new owners is Thomas Werner, who has experience both as a baseball owner (San Diego Padres) and in television (developing several sitcom megahits, including The Cosby Show and Roseanne).

Werner told FORBES he plans on increasing advertising revenue by bidding for major sporting events as they become available, as well as partnering with other regional cable networks. “The goal is to not just make it [NESN] essential for Red Sox and Bruins fans, but for all New England sports,” he says. Red Sox executives believe that NESN alone is worth $400 million.

If you think this is a pipe dream, keep in mind that Cablevision Chairman Charles Dolan, Larry Dolan’s brother, offered to pay $790 million for the Red Sox and NESN but was rebuffed in favor of Henry’s group. (Insiders say the league didn’t want to have two brothers each owning a team.)

Of course, using a baseball team to build a media asset isn’t new. Ted Turner used the Atlanta Braves to build TBS into the first superstation starting in the late 1970s, (see table). Tribune Co. did the same thing with the Chicago Cubs in the 1980s. But the value of cross-ownership is much greater today because Baseball Commissioner Bud Selig is making a big push to increase the sport’s revenue sharing, from 20% of local media revenue to 50%. Teams with cross-ownership will have a lot of leeway in what they report for cable fees.

Says sports economist Andrew Zimbalist of Smith College: “If you own the baseball team and the sports network, you can put the team’s revenues into the sports network and not subject it to revenue sharing. The more revenue sharing you have in baseball, the more advantageous it is to a team to own its own sports network.” Last season baseball’s richest teams gave $167 million to the poorest franchises to keep the league competitive.

The impact of cross-ownership is reflected in our ranking of baseball teams (see Ranking Table). Of the five most valuable teams, four (New York Yankees, Los Angeles Dodgers, Boston Red Sox and Atlanta Braves)either own cable networks or are owned by a media company. An even more telling statistic: These four teams are worth an average of $504 million, versus a league average of $286 million.

For the fifth consecutive year the Yankees take the top spot. This year the Bronx Bombers rose 15% in value to $730 million. Owner George Steinbrenner had a deal with Cablevision’s MSG Network that would have paid him more than $50 million this season. The Boss, who also controls New Jersey’s pro basketball and hockey teams, the Nets and the Devils, thought that figure was too low and paid the cable outfit $30 million to get out of the contract.

Instead Steinbrenner is starting his own sports channel, the Yankees Entertainment & Sports Network. This year YES will show the Yankees and the Nets; the Devils will be added in 2007. The network is looking to charge cable companies $1.85 a month per subscriber to carry the channel on their local systems. With 8.6 million TV households in the New York area, YES has the potential to generate close to $200 million in subscriber fees alone. The value of the YES Network is already pegged at a minimum of $850 million.

The Dodgers surged 14% in value, to $435 million, to overtake the Braves as the third-most-valuable team. In 1998 News Corp. paid a then-record $311 million for the Los Angeles Dodgers. Rupert Murdoch realized that Walt Disney, which had purchased stakes in the Anaheim Angels and hockey’s Mighty Ducks during the mid-1990s, planned on using its teams to launch a southern California cable sports channel. Buying the Dodgers helped Murdoch solidify his second cable sports channel in southern California and thwart Disney’s efforts.

Yes, the Dodgers lost $29.6 million last year because they have the third-highest payroll in baseball after signing stars like pitcher Kevin Brown and outfielder Shawn Green. But the Dodgers are worth every penny. Marc Ganis, president of Sportscorp, believes that launching the two Fox Sports Net regional networks in southern California and securing the broadcast rights to the Dodgers has added over $200 million to the value of Murdoch’s broadcast holdings.

In Canada Rogers Communications, the country’s largest cable outfit, bought 80% of the Toronto Blue Jays from Belgian brewer Interbrew in late 2000 for $112 million. Last year the team had an operating loss of $20.6 million. But the increased value to Rogers of being able to carry the Blue Jays’ programming has been enough to increase the team’s total worth to $182 million. After broadcasting 31 games on its cable channel Sportsnet last season, Rogers plans to broadcast 106 games in 2002.

The national pastime has become so attractive for cable–football is shown almost exclusively on network TV, while basketball and hockey schedules have half the number of games as baseball–that sometimes just the threat of a team’s starting its own cable channel is enough to land it a fat cable deal.

Last season the local media revenues for the Seattle Mariners were the largest of any team outside of New York, Atlanta or Chicago–$28.8 million–despite playing in the 12th-largest media market. Fox Sports Net signed a ten-year deal with the Mariners in 2000 for $288 million, in large part because the team’s cable rights hit the market at the same time Paul Allen and Barry Ackerley were contemplating the launch of their own regional sports networks. Seattle went up in value 12% to $373 million.

With NESN the Red Sox will certainly have the cash to be a financial success. But to erase the Curse of the Bambino, the Red Sox still have to win a World Series someday.